When the COVID pandemic led to economic shutdowns in the spring, it was immediately apparent that it would have an impact on state budgets.  As the pandemic (and the shutdowns) dragged on into months, and then quarters, it became increasingly apparent that the effect would be devastating.  Moody’s Analytics estimated in June that state and local governments would lay off 4 million employees to balance their budgets, of which 1.5 million were already furloughed or laid off by July.  The numbers also started to show up in the Federal Reserve’s state and local government payrolls data – local government payrolls fell from near all-time highs to 2003 levels in a matter of weeks.

The $2.2 trillion March federal stimulus bill was a great help to individuals and businesses, but state and local governments were largely restricted from spending money on anything not directly tied to combating the virus.  This prevented them from offsetting tax revenue losses from shuttered businesses and payroll taxes, which are used to fund basic services.  And while the House-passed HEROES act provided more flexible relief for state and local governments, it failed to pass the Senate largely because of that relief.

Where do things stand now?  As seen in the chart above, state and local government payrolls are still nearly as low as they were in the summer.  Most states have passed 2021 budgets, but many of them avoided the required cuts in the hopes that Congress would help them float during the pandemic recovery. 

Absent that help, it’s estimated that many states will cut agency budgets by as much as 15-20 percent by the middle of the fiscal year (most state budgets start their fiscal year in July).  The National Conference of State Legislatures is keeping a list of state actions to close the budget shortfalls, which includes cuts in everything from Pre-K education grants and support for those with developmental disabilities to reducing court system budgets.

In short, without hundreds of billions of dollars of federal help, state and local payrolls are likely to be squeezed much harder in the coming months.

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